I don't know if
you can call it dull, with all of the wrenching ups and downs, but after six
months of churning, the markets have gained less than 3%, about as much as they
might in a single brisk day.Still,
it is a gain, and we should be happy.

For the most part,
the second quarter was less volatile than the first quarter, as stocks finished
climbing back out of the hole and then leveled off.Then the Brexit vote came in, with Britain voting to leave the EU.Stock markets, which view uncertainty as anathema, registered their
displeasure and tumbled big.Still,
other than a few dramatic days, it was a calm quarter.

Here at home, the
Fed has again delayed taking any action; rates dropped a little, meaning that
bonds edged up.There is not much more “little” for rates to drop, with
the 10-year treasury yielding below 1.5%.

The relative quiet
gave me time for philosophical contemplation, for which I apologize in advance.

I
think in decades, and it recently occurred to me that perhaps I was getting a
little long in the tooth to be thinking in such terms.But money is more than a life-long marathon, it is a multi-generational
thing.Though your assets may be
dinged by inheritance taxes, end-of-life medical expenses and so on, proper
stewardship will enhance the lives of generations to come, even if your assets
are not huge.So, no matter your
age, when considering any investment, you should be looking out ten, twenty or
more years, because it is near impossible to see what will happen to prices over
any shorter term.

What
we can rely on is that, over time, currencies will be debased; good companies
will likely earn more money; their stocks will probably sell at higher prices;
and, hopefully, they will distribute more in the form of dividends.

You
may not think of dividends as a significant reason to buy stock, but it has been
shown that dividends are extremely important, accounting for around 40% of
long-term performance.If a company
pays no dividends, then there are only two reasons that someone might buy that
stock:first, for the prospect of a
dividend in the future; and second, in the hope that the price of the stock will
increase.

This
latter reason might look suspiciously like the "greater fool" theory:in a nutshell, that someone even more foolish will come along and buy the
asset from you at a higher price than you paid.This is a little over-simplistic, as some of my best performers have
never paid a dividend.But
think about it:if there is no
chance of sharing in the earnings of the company, why would anyone ever buy a
stock?

In
recent years the term "returning money to shareholders" has become
popular.You might think that this
phrase refers to dividends, but no:the
main method being used to return money to shareholders is by buying back stock
and retiring it.The number of
shares outstanding thus shrinks. When each dollar of earnings is then spread
over fewer shares, the result is higher earnings per share (EPS), in theory
leading to a higher stock price.

My
problem with this philosophy is that the companies are not exactly returning
money to shareholders; they are giving it to sellers who are then no longer
shareholders.And any beneficial
effect on the price of the stock is extremely fleeting.

Why
would a company do something like this?The
reason is that the earnings and bonuses of top management are often dependent
upon the simple metrics of earnings-per-share and/or stock price.Thus we see that a number of companies whose absolute-dollar
earnings may run flat for several years nevertheless are able to increase
earnings per share over that same time period.

Conceivably,
companies could use those same funds to pay down debt, an action that would also
increase EPS.Why don’t they do
that?Because interest paid is a
tax-deductible expense.And while
the effect on EPS would be positive, it is not quite as positive as reducing the
share count.

Paying
down debt would be beneficial to all shareholders, strengthening the balance
sheet and also increasing earnings per share.Paying down debt is a long-term strategy.Too many companies today are managed for the next quarter rather than for
the years ahead.Leave the daily
swings to the gamblers; as investors, we should instead be focused on the
decades to come.

File
this information along with our previous discussion of “adjusted” earnings.Both practices are often referred to as financial engineering, but
financial sleight-of-hand is an equally descriptive term.When investigating stocks, look only at true (not “adjusted”)
earnings, and look for companies that are increasing their dividends and/or
paying down debt.Then you can invest with confidence for the long term.